From the article:
Under this system ... managers sort fixed percentages of their employees into categories like "superior" or "needing improvement"; those in the top group typically receive the best compensation, training and promotions while those at the bottom may be denied raises or promotions, or even fired.On this last point, I suspect that the initial gain is because the forced rank is used at first to fire employees who should have been nudged out of the company a long time ago. After that first win, further gains are lost to damage to morale and team cohesion.
Critics ... contended that rating -- and even firing -- employees by using a statistical curve hurt morale and teamwork, and that vague standards opened the door to bias.
Empirical evidence is mixed on the effectiveness of forced rankings. A study last year ... found that if a company used the ranking system and fired 10 percent of lower-ranked employees, that company's performance improved markedly, but the gains shrank rapidly in successive years.
Here, it is worth considering the results of a study described in Worth Magazine (PDF) on the relationship between morale and company performance:
Our research shows repeatedly that the relationship between morale and performance is reciprocal -- a "virtuous circle."I think the "gift" point is particularly important. Treating people well can be seen as a form of gift exchange, creating more of a friendship than purely economic relationship between the company and the employees. Put simply, people care more about a company that cares about them.
In both 2004 and 2005, the stock prices of companies with high morale ... outperformed similar companies in their same industries by a ratio of 2.5 to 1. Meanwhile, the stock prices of companies with medium or low morale lagged behind their industry peers by greater than 1.5 to 1.
Why is high employee morale so strongly related to stock prices? Morale is a direct consequence of being treated well by a company, and employees return the "gift" of good treatment with higher productivity.
There are three factors that fuel employee enthusiasm: fair treatment, such as equitable wages and benefits ... a sense of achievement or pride ... and camaraderie among co-workers.
Back on problems with forced rank, I enjoyed this tidbit at the end of the NYT article:
Critics of performance reviews have been around for a very, very long time. When the Wei dynasty in China rated the performance of its household members in the third century A.D., the philosopher Sin Yu noted that "an imperial rater of nine grades seldom rates men according to their merits, but always according to his likes and dislikes."Ah, yes, wouldn't it be wonderful if modern management could learn lessons that were apparent 1750 years ago?
See also my May 2006 post, "Microsoft drops forced rank, increases perks".
See also my April 2004 post, "The Human Equation".